The world in 2016: Powered by payments

Written by Todd Latham, CMO, Currency Cloud

26/01/2016

As we frequently remind ourselves at Currency Cloud, no one wakes up in the morning and thinks, 'I want to make a payment'. Although we all make a number of transactions throughout the course of the day, that’s not the end goal – we want to grab a coffee, pick up lunch, commute into work, or grab a gift for a friend on the way home. The payment itself is simply a ‘necessary evil’ in accessing the product or service we want. As such, digital platforms are increasingly streamlining payments for both consumers and businesses – reducing the physical process involved with making a transaction and consequently making the function more ‘invisible’ to the purchaser.

This 'invisible 'process has been driven in part by the growth of the on-demand economy. Services such as Uber have increasingly removed the payment from the transaction process. Rather than proactively paying a driver, we simply stop and start the journey, while the transaction is completed for us in the background, via direct debit or a subscription model.

It’s what you don’t see
While the purchaser is becoming increasingly distanced from the payment transaction itself, the technology behind the scenes must work harder than ever to support and deliver this seamless user experience. According to a report from the World Economic Forum (WEF), we can consequently expect continued disruption in the payments space, as the fast paced, global commercial environment continues to evolve. The WEF identifies three potential outcomes: payment market consolidation, fragmentation or displacement of credit cards. The latter is already being demonstrated through merchants increasingly encouraging customers to link their bank accounts with a merchant’s payment platform – removing the interruption of the payment process. The WEF points out that direct debit – already popular in the consumer space – will also grow in significance for enterprises as a means to accept transactions without disrupting the customer.

Digital services that promise seamless processes are under pressure to adopt these flexible payment solutions – if the payment system goes wrong, the model falls apart. However, as their expertise lies in first-class user experience and innovative P2P models, they require support from elsewhere - especially as rigid legacy payment structures provided by the banks were not designed to cope with the high volume, low value processing requirements of on-demand services.

As such we are seeing a continued shift towards dependence on digital payment infrastructures – both for domestic and international payments. Their cloud-based flexible solutions are able to support the constant flow of instant transactions. A recent study from Currency Cloud uncovered that 70 per cent of UK businesses already rely on electronic processing for international transactions. This figure is set to grow, as enterprises across a range of sectors continue to realise that streamlining their payments solutions is crucial to remaining competitive in today’s market.

Payments in the enterprise
Moreover, the globally distributed nature of a number of digital business models is changing the nature of payment flows – we are seeing an increase in international transaction volume, though the size of each individual payment is going down. While this may be driven by demand from consumers for an uninterrupted, instant and seamless process, this shift is also visible in the B2B market. Global retailer Zara has adapted its model to suit the ‘fast fashion’ demands of today’s customers. Rather than investing in large batch orders and hoping for the best when it comes to sales, they await the latest trend and then place smaller orders just a month or so in advance of when they require the stock. As such, speed of transaction, even across low volume orders is integral to the success of the business.

In the B2B space in particular, it is crucial that payments are just as seamless across international borders. With workforces and customers becoming increasingly global – enterprises need to ensure they can make payments instantly, as the consequences can be costly. While FX losses may be a minor inconvenience for the odd low-value consumer payment, they result in major profit losses for businesses that manage international payments on a day-to-day basis.

Payments what next?
With regulation such as the Payment Services Directive (PSDII) moving in line with this shift and reducing the barriers to entry for alternative payment providers, we can only anticipate more disruption in this space throughout the New Year and beyond. Over time, incumbent banks will likely find themselves operating an increasingly tertiary role – providing the underlying infrastructure for investments and deposits, meanwhile digital payment solutions compete to provide the crucial payment processing facilities required by e-commerce and on-demand business models. This will become even more prevalent in the B2B space as companies recognise the importance of embracing digital solutions to remain competitive in today’s market. Moreover, as the on-demand generation that has been born into this model moves into the business world, they will take these expectations of speed and non-interrupted transactions with them into their corporate lives – further fuelling demand for forward-thinking, digital solutions.

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